Real estate prices in the San Fernando Valley have shot to all-time highs, making buying a home in the future seem far from affordable for most college students.
Housing market prices in Southern California continue to increase exponentially. Rent rates have also risen, but at a slower pace. Both have a low supply of available units but a high demand of customers.
According to the Southland Regional Association of Realtors website, the median price for single family homes in the San Fernando Valley in March 2005 was $525,000. The price tag last year in the same month was $442,000. In March 2003, the median price was $343,000.
According to a survey by M/PF YieldSTAR for the fourth quarter of 2004, the mean rent for a two-bedroom apartment was $1,475 in the San Fernando Valley, and $1,500 for all of Los Angeles County.
According to Delores Conway, director of the Casden Forecast at the USC Lusk Center for Real Estate, there are approximately 1,200 new apartment units being built in the Valley, and the largest complex is near the Warner Center in Woodland Hills.
“The monthly payment for rent is less than the cost of owning a house,” she said. “We’ve seen really great price appreciation for houses, but rents have not gone up at the same pace.”
“Because interest rates are so low, people are rushing in to buy,” Conway said. “Interest rates have been at 40-year lows, but they are rising.”
She also said condos may be more affordable, as their prices are traditionally lower than houses.
Experts have varying opinions as to whether it is a good idea for young people and students to buy a house, and how they should go about paying for it.
Conway said she believes the appreciation of house prices is slowing, so that when current students are ready to buy in a few years, houses will be more affordable than they are now.
“Young adults fresh out of college have always had difficulty buying a house,” said Lynn Rinker, a real estate broker for Coldwell Banker. “This isn’t a new phenomenon because of the high prices.”
Jeffrey Fischer, real estate broker for Realenomics Inc. and a CSUN alumnus, said the tax write-off for owning is a good benefit, but young people should wait before investing in a home.
“Someone out of college has to be very careful (and) save their money,” Fischer said. “You want to have fun, so college students don’t need to worry about getting a house. If you change your mind (about where to live), you want to be flexible.”
Jennifer Olson, loan officer at Countrywide Bank in Woodland Hills, said it is very unlikely houses will depreciate in value in the future.
“I wouldn’t recommend to anyone not to buy a home,” Olson said.
“Now that young people are getting educated and making a higher income bracket, and are therefore more heavily taxed, a good way to make up for it is buying a home and getting a tax break,” said Ando Hacopian, senior criminology major and realtor.
Olson suggests having credit cards and car loans as early as possible to build up credit, and to pay all bills on time.
“Cars are nice and flashy but won’t help you build wealth,” Olson said. “A home is the best vehicle with which to build wealth. Owning a home has a tax advantage.”
For the state of California, the median price of a home in February 2005 was $471,620, according to the California Association of Realtors website. This was a 20 percent increase from the price of a home in the same month last year.
The fact that so many people have an increasing demand for houses and apartments, but so few are available, causes the prices to go up.
“There’s not much land to build on; that’s the big problem,” Fischer said. “What’s been going on for the last three years is out of this world. The prices are unbelievable. No one can afford a house.”
Even if a person already owns a house and decides to buy a new one for the same price, the property tax is so high that it doesn’t make selling worth it, Fischer said.
“People don’t want to move, so there’s not a lot for sale,” Fischer said.
Rinker agreed that a lack of supply has helped keep prices high.
“The difficulty we’ve had is there is so little new construction,” Rinker said. “We are over 1 million units short. There is land, but it’s not zoned for high density, and building is expensive.”
Fischer said that in 1990, just before the real estate market in Southern California took a turn for the worst, there were 13,000 units available for sale.
“We all thought at least it would level off in 2001, but 2003 and 2004 were crazy,” Fischer said.
“My expectation is that prices will continue to go up, but at a more moderate pace,” Rinker said. “But I don’t see prices dropping in any significant way, either.”
SRAR also predicts prices will rise at a more moderate rate in 2005, somewhere around 10 to 15 percent instead of 20 percent, which was the increase from 2004 to 2005.
Fischer, on the other hand, believes prices are likely to drop in the future.
“If we had a 30 percent drop in prices, it wouldn’t surprise me, because prices right now are way too high,” Fischer said. “It would kill the market though.”
However, there are some alternative finance options future buyers may not have previously considered.
Mortgages and financing make it possible for many people to own homes, even those with incomes lower than what CAR suggests is needed in order to buy a house.
“One of the things that has helped a lot of people buy houses in the current market is mortgages,” Rinker said. “It’s a lot easier for buyers to find what works for them.”
“The affordability index uses conventional financing,” said Donald Bleich, professor of real estate at CSUN. “If you use special financing, housing is more affordable.”
Other alternative options are moderate down payments of about 10 percent, rather than the standard 20 percent, adjustable rate mortgages with very low payments, and interest-only loans, Olson said.
A lease option also exists in some cases, which is financing arranged directly between the buyer and seller.
“The first step anyone should take is to contact a reputable lender and find out if they qualify, and if not, how they can qualify,” Olson said.
Regarding the fact that CAR suggests an income of over $110,000 to afford a typical house in the San Fernando Valley, Olson said it is not a strict figure.
“That should be used only as a guideline,” Olson said. “A potential buyer should meet with a lender to find out what they can qualify for with their specific financial needs.”
Rinker advised students not to take for granted the impact good credit has on a person’s ability to own a home.
“Recognize that everything you do with your finances and credit history now will affect you for seven to 10 years on your FICO score,” Rinker said.
Those credit scores impact whether someone is able to choose alternative financing, Rinker said.
“Good financial habits are like good study habits: They will last you for the rest of your life, and you should try to develop them now rather than later, because it will make a difference in the end,” Rinker said.